Saturday, November 28, 2009

Is it Right to Have the Poor Pay?

As someone involved in companies that are based on the idea of attacking global problems of pollution and health, I am deeply interested in the issue of whether it is "right" to have the poor pay for products. And I have spent much time trying to find innovative business models that create societal value and allocate it between customers, communities, investors and employees in a way that makes impactful solutions scaleable and sustainable.

In addition to my teaching, I have been quite involved in two companies that are based on the principle that the best way to achieve social good is through market based approaches. Envirofit, which designs, manufactures and sells cook stoves to poor people in India is a non-profit company, dedicated to developing environmentally friendly products so that poor people can lead healthier and more productive lives. Inviragen is a for-profit biotech company developing vaccinces for developing world infectious diseases in markets that traditional pharmaceutical company R&D has ignored. Is this the "right" approach to tackling these global challenges?

Some people have objected that it isn't "right" to have the poor pay for products and services on ethical grounds. They argue that for those who are wealthy to charge someone who is poor violates an ethical norm. That humans should provide charity for religous or altruistic reasons.

More recently, people have started to argue that having the poor pay isn't "right" because it violates rules of economic incentives. That, as Rachel Glennerster of MIT's Jameel Poverty Action Lab (J-PAL)* states in this month's Fast Company: "Charging small amounts is the exact wrong thing to do" to tackle issues facing the poor.

The data are several years old, as is the debate (I first blogged on it in March 2008). But with J-PAL now being featured in Fast Company, and one of its members, Esther Duflo recently being awarded a MacArthur "genius" grant, I am concerned about the ramifications of these catchy sound bites.

J-PAL studies are useful for what they show, but my concern is that their findings are now being applied with too broad a brush. Glennerster's comment is such an example. Perhaps she added caveats to her statement that didn't make it past the Fast Company editor's desk. Both examples are in the field of public health, an area where the societal and community effects are compelling for broad measures. But standing alone, the statement is dangerously overbroad.

As one J-PAL researcher put it in the Fast Company article, "it's more satisfying to answer small questions well than big questions badly." Yet statements such as Glennerster's seem to indicate a willingness to answer the bigger questions with limited data. While most of J-PAL's studies seem to be on government funded aid programs (see Duflo's suggested "Best Buys" to achieve UN Millennium Development Goals), their broader policy prescriptions don't seem to have boundaries. To apply this "pricing model" to the many social enterprises working today in Base of Pyramid markets would be foolish. Not only is it OK to have the poor pay for goods and services, it may often be necessary in order to have these goods and services exist.

To me, Glennerster's comment speaks to only one side of the equation, that of demand. Yes, people will use more mosquito nets if they are free, or get more infants vaccinated if they receive lentils. But that assumes that someone is willing to supply the nets for free, or buy the lentils to accompany the vaccines. In a small trial, this charity work can be done. The sponsor can buy a few kilos of lentils along with the vaccines. But at the massive scale required to really solve some of these problems, I am skeptical. Even the Gates Foundation with its billions cannot buy all the nets, vaccines, cook stoves, treadle pumps and school fees required to lift the world from poverty. With or without lentils. To use the fashionable term these days- charity doesn't "scale." What does scale is markets (and economists know this, don't they?). That is what has made the 4 C's ubiquitous in our world: Coke, condoms, cigarettes and cell phones. While I don't view markets as a panacea for every global challenge, I do think they are indispensable in development.

As my regular readers know, my argument is more nuanced. In some areas, where the problems are of a crisis nature, and governments are weak, charity is the most workable business model. Where problems are more chronic, such as vaccinations or education, but governments are weak and therefore unable or unwilling to provide such public goods, then enterprising, market based approaches offer a more sustainable business model. And these are typically driven by customers paying for their goods and services. Sometimes, the business model is purely commercial. Sometimes, as with Envirofit or International Development Entrprises, it is a hybrid, where donations are used to subsidize product or market development. Other enterprises which have the poor pay include Vision Spring, Grameen Bank, and Kickstart. Even A-Z Textiles, a mosquito net manufacturer. When J-PAL argues that incentives work for the poor, they also need to remember that incentives work for producers. Yet they are curiously silent on who will make the free or subsidized goods and services to support the policies they propose.

To be sure, the actions of A-Z, Vision Spring, or even Grameen Bank are still small. I don't claim that there is any one path to reducing poverty and improving public health, education and the environment. Charity and "free" products will be required in some instances, but so will having the poor pay.

While I am pleased that J-PAL is bringing new approaches and insights to the field of international development, I encourage them to remember that the field has humbled many with big new ideas. Most tools are useful only in specific situations, even economic tools (like randomized trials). To dispel myths is important work, but broad statements of general application begin to build new myths that may be just as mistaken.

The title to this post is purposely provocative. My answer would be "much of the time, but not always." Not a very good sound bite for a reporter. But it sounds "right" to me.

*NOTE: I have recommended J-PAL's work to BOPreneurs. And I found one of their recent studies on the impacts of microfinance to be useful for some of my work in that field.

Update 11-30: NextBillion's Francisco Noguera posted on the Fast Company article and this post. Thank you to those who have commented on this post and for providing more examples. Also, William Easterly recently blogged on another aspect of randomized controlled trials, noting they will "only EVER be available for a small sample of aid projects."

Thursday, November 26, 2009

AYZH and Ears on TEDIndia

The following guest post is from Zubaida Bai, a graduate student in Colorado State's Global Social & Sustainable Enterprise program and TEDIndia fellow. She is hard at work launching her social enterprise, AYZH (link below) and is definitely a BOPreneur-in-training. I have no doubt that with her vision and passion, she will have a lifetime of impact. Here are her reflections on her time at TEDIndia.

It has now been a week after TEDIndia and I am still trying to absorb the impact of my experience. I met entrepreneurs who were distinctive horizontally as well as vertically on the business spectrum; a Chef, a race car designer, a monkey explorer, a humorous website designer, a blogger, a health worker, an artist, a film maker, a chief ethical officer… the list is endless. As I stood admiring this exceptional group of individuals, I was unaware that among this cream of the crop, were two individuals whose work would touch me the most; Sunitha Krishnan, a woman who has dedicated her life to saving young girls from the terror of Human Trafficking in India and Babar Ali, a 16 year old headmaster running a school without walls for over 2000 children in Bangladesh.

The first impression on arriving at the Infosys Campus was of awe as we passed walked through a myriad of architecture from around the world. As I sat in my room late that night going through the day’s events, I realized the artificial atmosphere such landscapes created and how easy it was to get carried away. That night, I made a decision of not letting this atmosphere sway me but learn from it and enhance my experience as I interact with such a large gathering of amazing individuals over the next 3 days.

Within the first hour of the next morning as I went about meeting new people, I knew I had made the right decision of leaving my assumptions and inhibitions behind. Each interaction demonstrated a unique effort at making the world a better place precious for life. As the day progressed, on one side I was humbled beyond words with each contact I made on the other side I saw these individuals were so very similar to me, driven by their desire, energy and passion to make a difference to a burning need in the world.

The TED experience reinforced my belief, that what matters is not how big or small your contribution is to the problems around the world. The key is to identify these problems and make an effort to solve these problems. With AYZH – Technology Solutions for Women, I have begun to tread the path of empowering women through affordable health and livelihood products. I am supported my expectional individuals and entities in India and USA in this initiative and together I am sure we CAN and WILL make our contribution.

I have to admit that I once felt "how silly is it to spend $2500 for a conference and watch a talk in person which you can watch online for free?" But I realized this is what makes a life changing TEDific experience. If and when I can afford, I would most certainly make the investment of time and money to go to many more TED conferences.

I have been talking about all good things. Yes, there are dark sides too but the bright ones cover it up and I bet I won’t even remember the negatives. I am in a sense missing the endless days, starting at 7 am with exchanges about ‘this is what I do’ and ending with informal late night interactions about ‘this is who I am’.

Finally, it was also great to hear from C. K. Prahalad talk about “learning disabilities” of organizations and from Thulasiraj Ravilla about Lions Aravind Institute of Community Ophthalmology after having learnt about them at GSSE. It was also exciting to see the GSSE theme echoing throughout the conference of making social businesses sustainable and viable.

Bonus Pack: My two "must watch" picks for TED Talks: Hans Rosling and Sunitha Krishnan.

Tuesday, November 24, 2009

Come and Get IDDS

Limited time offer for aspiring BOPreneurs:

The International Development Design Summit is now accepting applications from project teams with working prototypes for products focused on addressing the needs of communities in the developing world.

From the website:
Whereas previous versions of IDDS focused on creating prototypes, IDDS 2010 will focus on turning prototypes into products and project teams into ventures with business plans. Dissemination and marketing will be significant aspects of this summit. We will also focus on what happens after IDDS and how teams will continue working on ventures after the summit. In short, participants will have the opportunity to explore the many challenges of entrepreneurship and technology dissemination for developing markets with a diverse group of people from around the globe. By the time IDDS ends, you can expect to have developed a richer understanding of ways to disseminate your innovation at scale, a plan to move your venture forward, and a broader network of people who can assist you with both.

We have been recruiting faculty and guests and can GUARANTEE that those teams that participate will have an opportunity to significantly advance their ventures. Faculty from MIT, Olin, Colorado State, KNUST, UC Davis, and Bainbridge Graduate Institute. Guests from Cooper-Perkins, IDEO, Acumen Fund, IDE, NCIIA, Stanford, Envirofit, Sprig and Hummdinger. The goal is a collection of collaborative energy from around the world focused on dissemination- people who are interested in taking action and moving forward with new approaches.

So here's what you need to do to get started. Download the form. Fill it out. Send it in.

May the force be with you.

Sunday, November 22, 2009

Impatience is a Virtue

My bleeps know I am not long on patience, particularly when it comes to metrics. Not so long ago, I ranted a bit about how incredibly bored I am with this topic. Since then, I have been to two conferences, where, unfortunately, it reared its head. The most recent of these, this past Friday, was entitled "Change that Counts" and had a definite metrics and measurement tilt.

Don't worry. I am not going to rant some more about metrics.

Instead, I am going to poke at the issue of "patient capital." This seems to be an emerging thread in a lot of conversations I have with young entrepreneurs. In part, I think, because of the good work of folks at Investors Circle, Acumen Fund and others. But I am a bit worried about the concept.

See, it is the nature of capital to be impatient. It seeks a return, just as salmon swim upstream or birds migrate. To ask it to be patient is to change its nature. Now, if I wanted to fit in, I would start to wax about how this transformation will lead to great environmental and social change. Indeed, to transform capitalism and our world. Cue tweeting birds and global peace. More offers to get me to sit on panels at conferences. Yup, there are many advantages to transforming capitalism.

But no. I don't want to fit in. I want to fix stuff. To get stuff done. And I think that impatient capital is more likely to change the world. I believe that time is of the essence, and I want impatience. When you go to the emergency room, are you a patient patient? No, you want to see things happen, stat! Worried about poverty, environmental degradation, infectious disease, climate change? Want to be a social entrepreneur? Then get going. And hire capital that will help you get going.

And hiring capital is the way you should think about it. Whether human, social or financial capital, look for common purposes, and one of those purposes should be impatience. I want to hire impatient people. I want impatient investors. To be mission focused DOES NOT mean you can't be impatient. In fact, I believe all triple bottom line focused organizations should be MUCH MORE IMPATIENT than their more traditional competitors. Entrepreneurs throughout history have won on hustle, not patience. Persistence, not pondering.

An example of a social enterprise based on respecting the impatience of capital? Kiva. Some believe it's key innovation was connecting microloan borrowers directly to lenders. Important for sure. But they are built on the idea that you get paid back by the person you help. I think that is the core innovation. Kiva scratches my charitable itch, but it also lets me reuse my capital by reinvesting it in another venture. This is harnessing the nature of my capital better than a more traditional non-profit. My capital pushes for better reporting, more transparency, better entrepreneurs. And more capital is coming into this system. I doubt this would be the case if the default rate were 50% and I was really "giving away" 50% of my capital.

To be clear, if an investor wants to advertise that they offer patient capital, that's fine. Let them compete for deal flow. But for the entrepreneurs, be careful. Be sure "patient capital" doesn't make you patient. Don't think that taking patient capital relieves you from the obligation to think about the things that are important to capital: returns, time horizon, exit strategies, milestones. These are the things that will drive your team to think about impact, sustainability and scale... and to get going about changing things.

Don't believe what your parents and teachers told you. For entrepreneurs, impatience is a virtue.

Update 11/23: Yasmina Zaidman from Acumen blogged today on "Patient Capital- A Bridge Over Troubled Waters." I commented that investors need to emphasize that patient capital does not mean complacent capital.
Update 11/27: Yasmina's reply was typically thoughtful: "If there’s one thing we look for in our entrepreneurs and our colleagues it’s impatience. But Patient Capital now stands as an alternative to the “get rich quick” approach that has gutted our economy and our planet, leaving massive inequality in its wake. So, we envision a patience that enables market forces to play a role even when the dividends take longer to materialize, and are as much social as they are financial. And we aim to get there are quickly as possible, but not so fast that we continue to leave two thirds of the world behind. It’s a daily conversation to explain that this approach requires even more rigor, urgency and commitment to sheer excellence than EITHER straight business or straight charity, but it’s a conversation worth having."